Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange. Big Board volume was light at 321.1 million shares, typical for the latter part of the week before Monday's Labor Day holiday.

Next Friday, Wall Street faces the key monthly employment report, which has been known to cause dramatic swings in stock prices.

"We had two very strong economic reports," said David Shulman, Salomon Bros.' chief equity strategist. "There are more worries in Bond Land. Fears of a Fed tightening next month have resurfaced for the first time since the end of July."

The Commerce Department reported that the nation's gross domestic product expanded at a 4.8% annual rate from April through June, instead of the 4.2% estimated a month ago. Another report showed that sales of new homes jumped unexpectedly in July to the briskest rate in five months. The report led some managers to "give up on the idea that the economy is slowing in the third quarter," said Hugh Johnson, First Albany Corp.'s market strategist.

The resignation of Dick Morris, President Clinton's top political advisor, added to uncertainty in the bond market. Morris helped steer the president toward more fiscally conservative budget policies, a stance that is favored on Wall Street.

Among Thursday's highlights:

* J.P. Morgan lost 1 1/8 to 88, Wells Fargo was off 3 7/8 to 248 7/8, Cigna fell 2 7/8 to 114 7/8 and Merrill Lynch was off 3/8 to 62 1/4.

* PepsiCo was the most heavily traded New York Stock Exchange issue, off 1 3/8 at 28 5/8. Goldman Sachs removed the stock from its "recommended" list and downgraded it to "moderate outperform."

* IBM was a pocket of strength, up 1/2 to 115 1/8 after surging 2 7/8 on Wednesday after Salomon upgraded the stock.

* Red Lion surged 4 1/2 to 28 1/8 on news that it is in preliminary merger talks with Doubletree, which was off 5/8 to 37 1/2.

* Baxter International rose 2 1/2 to 45 3/8 on news that it would acquire Immuno International over three years in a deal worth $715 million.

* Sierra Semiconductor surged 2 5/8 to 11 7/8. The company said it plans to exit the highly competitive modem chip business and concentrate instead on the fast-growing market for computer networking equipment.

* Centocor lost 3 1/4 to 33 1/8. Oppenheimer & Co. raised questions about a key study in Centocor's leading drug, ReoPro, and called the stock "overvalued."

* Amtrol rallied 7 5/64 to 27 21/64 after an investor group agreed to buy the company for $218.9 million, or $28.25 a share.

* Interest-sensitive stocks were hit hard, with the Dow utility index losing 1.18%, or 2.59 points, to 216.32. Banking and other financial stocks lost big as well, including NationsBank, down 7/8 to 92 3/8, and Allstate, down 1/2 to 45 1/4.

* National Semiconductor rose 1 1/4 to 18 1/8 on heavy volume. Prudential Securities began coverage of the computer chip maker's stock with a "buy" rating, saying the company is going through "significant changes" and will emerge as a high-growth company with a good mix of "high-margin products" in fiscal 1998 and beyond.

Overseas stocks were mostly lower, with the Nikkei index in Tokyo, the FTSE-100 index in London and the DAX index in Frankfurt all losing ground.